What is QuickSwap?
QuickSwap is a decentralized Layer 2 application built on top of the Polygon blockchain that allows users to exchange ERC-20 tokens. Decentralized exchanges (DEXs) are blockchain-based applications that form the fundamental cornerstones of the growing suite of decentralized finance (DeFi) tools.
The QuickSwap DEX uses an automated market maker (AMM) model that allows users to swap tokens. It was founded in 2020 by Sameep Singhania as a Layer 2 DEX on the Polygon network. It promotes the ethos of decentralization by ensuring trustworthy, permissionless, and censorship-resistant cryptocurrency trading.
It acts as an automated DeFi liquidity protocol where users add pairs of tokens to the liquidity pool and earn transaction fees from those using the pool to exchange tokens. Users can trade any combination of ERC-20 tokens seamlessly without an order book. As long as there is a pool of liquidity to do so, users can trade any pair through QuickSwap.
By providing a pair of tokens, anyone can open a new liquidity pool and start collecting transaction fees from other participants. This makes QuickSwap license-free; Anyone can start a new pool without needing permission.
QuickSwap is similar to Uniswap, the originator of AMMs, and offers the same functionality with similar liquidity protocols, but with a small cosmetic change: it is based on a Layer 2 (Polygon) scaling solution as opposed to Uniswap, which is built on top of Layer 1, the Ethereum -Blockchain.
QUICK (ERC-20 token) is QuickSwap’s native cryptocurrency. It has two use cases: governance and staking. QuickSwap’s governance model gives QUICK token holders the power to propose changes to the protocol and vote on a wide range of issues that affect its functioning.
Related: DeFi 2.0: A Beginner’s Guide to Second Generation DeFi Protocols
QuickSwap vs Uniswap
QuickSwap is a fork of Uniswap as it uses the same liquidity pool model. It has evolved into a fast, affordable, and Ethereum-compatible alternative to Uniswap. The difference lies in the fact that QuickSwap is based on Polygon while UniSwap is based on Ethereum.
This allows QuickSwap users to enjoy the security benefits of Uniswap’s verified code while benefiting from the high-speed transactions and near-zero gas fees that the Polygon network offers.
How does QuickSwap work?
QuickSwap uses an AMM model to provision token pools to allow users to swap, stake, and provide liquidity for token assets.
The following key features of QuickSwap make up the DEX infrastructure:
Liquidity Pools
Liquidity pools are a collection of digital assets that enable trading on a DEX. They are a crucial component in DeFi as they provide the much-needed liquidity traders need to operate with DEXs.
To create liquidity pools on QuickSwap, users lock their cryptocurrency into the protocol’s smart contracts, allowing others to use the locked assets. Think of it as a publicly accessible cryptocurrency reservoir. Those who fund this reservoir — also called liquidity providers — receive a portion of the transaction costs for each user interaction in exchange for providing liquidity.
On QuickSwap, liquidity providers receive 0.25% of trading fees proportional to their share of the pool.
Another interesting feature of QuickSwap is the switch from order book trading method. Traditionally, exchanges used order books for swap trades. Order books are a collection of real-time buy and sell orders where buyers set the price they are willing to pay, enter their order price, and then wait for their order to be filled. When a seller reaches this price, the order is filled.
This order book method often results in a subpar user experience with sometimes long wait times, low liquidity or lack of order execution, reliance on third parties to fulfill orders, and higher chances of fraud and hacks.
QuickSwap automates this through smart contracts that allow users to exchange ERC-20 tokens. When a user wants to exchange one token for another, they send their selected tokens to QuickSwap’s smart contract. The smart contract then calculates the amount of the second token that the user will receive based on the current market price, without relying on third-party buy/sell requests for the traded token. Pricing is done using QuickSwap’s AMM model.
Automated Market Maker
The QuickSwap AMM model determines asset prices and provides instant liquidity. It essentially democratizes access to liquidity through its algorithmic code. The QuickSwap AMM is like a financial robot or code that can suggest a price between two assets. Instead of the traditional order book, it uses the assets in the liquidity pool to determine the price based on the percentage of tokens in the pool at that point in time.
This process is programmatic and allows quick access to liquidity as the algorithm can always provide a price for a user. With this approach, a transaction can be completed without having to wait for the other side to show up. As long as there is sufficient liquidity in the respective pool, trades can be executed.
The formula for calculating the price of each token is x*y=k, where “x” represents the financial quantity of token A and “y” represents the financial quantity of token B, where “k” is a constant value. QuickSwap uses an AMM called Constant Product Market Maker where “x” and “y” multiply to create “k” whose value cannot change.
For example, Alice wants to swap Dai (DAI) for Ether (ETH) using the QuickSwap DAI-ETH pool. She added her Dai tokens to the pool for ETH. This increases the ratio of Dai in the pool, causing ETH price to surge. But why? Since there is now less ETH in the pool after the transaction, and according to QuickSwap’s AMM formula above, the total pool liquidity (k) must remain constant. To maintain “k” the price of ETH will increase.
This mechanism determines the pricing. So the more Dai Alice deposits, the less ETH she gets back because the price of ETH goes up. Ultimately, the price paid for that ETH is based on how much a given trade shifts the ratio between the token pool.
token exchange
Without the need for a crypto-to-fiat exchange, cryptocurrency swapping allows users to exchange one cryptocurrency for another instantly. Time and cost savings are clear advantages, but by no means the only reasons for a change.
Sometimes traders exchange tokens in order to profit from an anticipated market movement. In other cases, swaps occasionally have to pay transaction fees that can only be paid in the native coin of a particular blockchain. As a result, a user of The Sandbox (SAND) may need to make an exchange for ETH or Polygon (MATIC) to access the Polygon network.
QuickSwap charges a small transaction fee of 0.3% for every trade made on the platform and almost no gas fees. The liquidity providers receive payments from the fees generated by the swap.
Ephemeral Loss
Impermanent loss is a possible risk faced by AMM liquidity providers like QuickSwap, Uniswap and other such DeFi platforms. A temporary loss occurs when a liquidity provider allocates tokens to a liquidity pool and the price of the pledged token changes compared to when it pledged them.
Liquidity providers must place both assets of the trading pair in a liquidity pool. For example, in an ETH-DAI pool, if trades decrease the amount of ETH in the pool and its price increases, the liquidity provider will suffer a volatile loss as it is now holding less ETH as its value has increased.
The loss is said to be volatile as the price of ETH can rise back to the original deposited value and the trading fees received can even exceed the loss. Therefore it is not permanent. However, it is a risk that must be considered.
How to use QuickSwap to swap tokens
They allow cryptocurrency traders to trade without banks, brokers or other intermediaries. QuickSwap is a DEX on the Polygon network that offers swapping, liquidity, yield farming and much more.
The following steps explain how tokens are exchanged on QuickSwap.
Steps to use QuickSwap to swap tokens
Step 1: Open QuickSwap
Open QuickSwap in a browser and connect to a Polygon-powered wallet like MetaMask. Make sure you have some MATIC in your wallet to make the transaction easier.
Step 2: Click on the “Swap” tab on the navigation bar.
Open the Swap tab and select the token pair to swap.
MATIC is shown as the default token, but you can enter any ERC-20 token instead. Enter the token to exchange from and the token you want to receive.
Step 3: Click on the “Swap” button.
Click the Swap button and perform the swap. Preview and confirm the transaction by signing the wallet.
The future of decentralized exchanges
DEXs have grown in popularity in recent years thanks to growing interest in DeFi. DEXs allow users to trade cryptocurrencies without the need for intermediaries or centralized exchanges, providing greater security, transparency and control over assets. As the DeFi ecosystem continues to grow, the future of decentralized exchanges looks bright.
The growth of cross-chain interoperability is a trend that is likely to continue. The majority of DEXs currently run on a single blockchain, but the ability to trade assets between chains is growing in popularity. This would increase liquidity and give users access to a greater variety of assets.
Decentralized exchanges are increasingly being integrated with other DeFi applications such as lending protocols, yield farming platforms, and prediction markets. This allows users to easily transfer assets between applications in a smoother and more connected DeFi ecosystem.
DEXs like QuickSwap offer significant advantages for cryptocurrency trading. As they improve their functionalities, they see an upward trend in users, assets, total value locked and liquidity. Additionally, blockchain-based smart contract initiatives allow these users to operate on DEXs with complete anonymity in a trustless financial environment.
Regulatory hurdles remain as different regulations apply to DEXs around the world. Regulators will likely take a closer look at DEXs and other decentralized apps as the DeFi ecosystem develops. However, since these platforms operate in a decentralized and borderless manner, it is unclear how regulators will control them.
Another area where DEXs can be improved is the user experience. Compared to centralized options, many users find decentralized exchanges complex and difficult to use. However, creating user-friendly interfaces and integrating DEXs into existing DeFi programs can make DEXs more accessible to a larger audience.
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